Investment Review for First Quarter 2020

The end of the expansion.

While not official, the longest economic expansion on record for the United States ended during the first quarter. It will likely be a few months before the National Bureau of Economic Research makes it official, but the only real question at hand is whether it ended in February or March.

Similarly, the U.S. stock market, which began appreciating a few months before the end of the last recession, has risen significantly since March of 2009 in what was the longest bull market in history. That changed in the first quarter of this year as individuals, businesses, and governments began to digest the magnitude of the Coronavirus pandemic. The sell-off was not isolated to the U.S. as stock prices fell across the globe. Companies were affected regardless of their size and geographic location. From their February peaks, stocks across the board fell over 30% at their worst point, officially ending the bull market and triggering a bear market.

Major asset class returns.

Q1 2020

2019

Core Bonds – Taxable

(BBGBARC U.S. Agg)

3.1%

8.7%

Core Bonds – Municipal

(BBGBARC 5Yr. Muni)

-1.0%

5.4%

Global Stocks (as a whole)

(MSCI AC World)

-21.4%

26.6%

U.S. Large Stocks

(S&P 500)

-19.6%

31.5%

U.S. Mid Stocks

(S&P MidCap)

-29.7%

26.2%

U.S. Small Stocks

(S&P SmallCap)

-32.6%

22.8%

Foreign Developed Stocks

(MSCI EAFE)

-22.8%

22.0%

Emerging Market Stocks

(MSCI EM)

-23.6%

18.4%

Commodities

(Bloomberg Comm)

-23.3%

7.7%

Real Estate

(DJ Glb Select REIT)

-29.9%

22.9%

Volatility.

To say that the recent volatility is unprecedented is an understatement. The fear index (CBOE VIX Index) which started early 2020 at 12.5, reached 80 during the quarter, a number characterized as extreme panic, which has not been seen since the great recession.

Outside of the fear index, investor concerns were evident in the daily swings of stock prices. In the first quarter of 2020, U.S. large companies (as represented by the S&P 500 index) experienced eight days with a 5% price move. In comparison, a 5% daily price move only occurred 38 times total during the prior 50 years (Jan. 1970 – Dec. 2019).

Even more extreme, of those eight days mentioned above, four of the price moves exceeded 9% (an extreme only occurring five times between 1970 and 2019).

Oil price war.

In response to a recent reduction in crude oil demand, on March 5 members of the Organization of the Petroleum Exporting Countries (OPEC) agreed to a 1.5 million barrel per day cut in oil production. The cut, however, was to be applied pro-rata between OPEC and non-OPEC counties. Disastrously, this decision was made without the consent of Russia, which announced it would not comply with the agreement. In the days to follow, both Saudi Arabia and Russia announced production increases causing oil prices to plummet. The result was a reduction in oil prices from over $60 per barrel to $20 during the quarter.

Jobs.

Closures of non-essential businesses in many states led the labor market to begin contracting for the first time in years. When March data was released, we learned that 700,000 jobs were lost during the month and unemployment rose to 4.4%. When analyzing more timely data, the numbers look much worse. Weekly unemployment claims, which measure the number of individuals who have just been laid off and are filing for unemployment benefits, skyrocketed to 3.3 million and 6.6 million for the weeks ending March 21 and 28, respectively. In comparison, we have become used to very low numbers hovering just over 200,000 per week. As such, the news that roughly 10 million people lost their jobs in only two weeks is staggering.

Government to the rescue.

The Federal Reserve was extremely busy during March, implementing numerous measures to add assistance to the economy. At first, the measures were focused on cutting interest rates and restarting the asset purchase program. Later, numerous other measures were taken: (1) to encourage bank lending to households and businesses, (2) to provide much needed stabilization for short-term borrowings and money market funds, (3) to stabilize currency markets and help with the surging demand for U.S. dollars, and (4) to provide additional support to specific areas of the bond market such as muni bonds, commercial mortgage-backed securities, and corporate bonds.

While the federal government took a little longer to respond to the crisis, they did so in an unprecedented fashion with a $2.3 trillion stimulus bill known as the CARES Act. While the provisions are too numerous to list, a summary can be found in our Insights article on the CARES Act.

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